Fidelity’s Market Week: November ends the seven-month run and examines the Santa Rally and the case for diversification

November ends a seven-month run for global shares as investors reassess AI valuations and interest-rate expectations. Despite a soft start to December, history suggests the Santa Rally could still deliver year-end gains, while stabilising markets and improving earnings forecasts underscore the growing importance of diversification.

Tom Stevenson, Investment Director, Fidelity International comments on what’s driving markets this week: “The MSCI All Country World index fell 0.1% in November. That was the first monthly decline since March, breaking a seven-month winning streak. The rally started as the shock of April’s US tariff announcements began to ease. But it ran out of steam last month as investors started to question the sustainability of the AI growth story and worried about rising valuations and a fading outlook for further interest rate cuts from America’s Federal Reserve.

December begins on the back foot

“December started on the back foot this week, with a renewed sell-off in cryptocurrencies. There were also lower share prices in Asia on the back of hawkish comments from the Bank of Japan. Japanese stocks led the reverse after the Bank of Japan’s governor Kazuo Ueda hinted that the next move might be up for interest rates. Bond yields rose to their highest level since 2008, and the yen strengthened against the dollar.

Santa Rally: what the numbers say

“If history is any guide, however, markets could get back onto the front foot. Analysis of the FTSE 100 and S&P 500 over the past 30 years shows that markets rise more often than they fall in the final month of the year. The so-called Santa Rally may sound like an investment myth, but the numbers point to its validity. The UK benchmark has risen in December 24 times out of 30 since 1995 and the US equivalent has been up in 22 out of 30 years.

“And it’s not just that markets have gone up in December. On average they have risen more than in other months of the year too. In the UK, the FTSE 100 is up by 2.1% on average in December, compared to the average monthly gain of 0.3%. 

“It’s not clear why shares should do well in the run up to Christmas. Investment of year end bonuses is one idea, although many of these are paid in the New Year. Lower trading volumes might be a factor. There’s no particular reason that sounds plausible, but the numbers are what they are.

Stabilisation after the November dip

“Coming back to this year, markets stabilised last week after the November wobble. The S&P 500 closed at 6,849, up from 6,603 at the start of the week. The FTSE 100 ended the week at 9,721, homing in once again on the 10,000 hurdle it looked at a couple of weeks ago before backing off. Market breadth improved with the number of shares that are standing above their 50-day moving average rising from 30% to 60%.

“There’s still talk of a stock market bubble, but it feels less frantic. Certainly, the market is less valuation driven. While multiples of earnings are high, they are not excessive across the market as a whole. Even the tech stock leadership does not look as frothy as it did 25 years ago during the dot.com bubble.

“And, importantly, earnings continue to support the bull market. Forecasts for the next few quarters are picking up and remain in double digit territory for the next half year at least.

“Also adding support are interest rates, where the odds of a Fed cut this month are now up to 83%. The inflation outlook is steady and that’s helped 10-year bond yields stabilise at around 4%. That’s higher than the low levels reached in the wake of the pandemic, higher too than the post-financial crisis norm of between 2 and 3% but it is not such a squeeze that the economy cannot continue to grow.

Why diversification matters now

“The important thing for investors is that signs of excess in markets are localised. Yes, some unprofitable tech stocks are trading at unsustainable valuations. But markets as a whole are not too expensive. That’s especially true outside the US. This makes a strong case for diversification. 

Data to watch this week

“Returning to this week, the data highlight will be the September inflation numbers in the US, delayed by the recent government shut down. Personal consumption expenditures – the Fed’s preferred measure – are expected to have risen by 0.3% in September, in line with the August rate. Year on year, inflation is forecast to be 2.8%, up a bit from 2.7% in August.

“The Federal Reserve is expected to take that as a green light for a third consecutive rate cut next week. Two more quarter point cuts are forecast for the first half of 2026.

“Other data in the spotlight this week include inflation numbers in Europe, forecast to hold steady at just over the ECB’s 2% target. Having halved interest rates in the region to just 2%, the European central bank is expected to leave rates unchanged despite comments in its recent rate-setting meeting that inflation risks were now ‘two-sided’.

“Meanwhile, in China, purchasing managers index data for manufacturing and services are both expected to confirm ongoing weakness in the Chinese economy as the government attempts to clamp-down on deflationary over-production.”